Tech

February 01, 2008

The Dirty Dozen Mistakes of a Startup Entrepreneur

Entrepreneurship is hard. Tackling technical and business problems and building a business from the initial idea up, one step at a time is very difficult.

Starting from the idea, technology entrepreneurs make certain mistakes that make their lives even more difficult. These mistakes can be caused by the entrepreneur fixating on what she is comfortable with - people tend to stay in their comfort zones -, or misconceptions of what is valuable in business or maybe simply being a first time entrepreneur. As investors in early stage technology companies, we keep on seeing similar problems in different companies, which tells us that these are common mistakes, especially in emerging regions.

Below is a list of these mistakes which we have seen and which might eventually cause a business to fail or or an opportunity to be missed. It isn't intended to be exhaustive but rather indicative. Some of the mistakes listed are common to the nature of the technology entrepreneur, but some are the results of the state of the sector in emerging countries.

Mistake No 1: "We are a framework company and can do it all"

The idea of a framework company sounds attractive. Especially, in this region entrepreneurs tend to collect their expertise into a "framework" with no product or application definition. Having a framework that works can be very advantageous. However, the downside is the entrepreneur's indecisiveness on selecting a focal application that will act as the showcase for the power of the framework. Sometimes, because the entrepreneur lacks sufficient knowledge on a specific area or the "productization" knowledge and expertise, she tends to sell the framework - and that puts her in a very difficult play.

An example of a successful framework is what the Skype entrepreneurs had. They had a great peer-to-peer distribution application that they developed in a company prior to Kazaa. Later they used this framework in Kazaa. Afterwards, in Skype and now in Joost. Each one of these applications are products that rely on solving the hard peer-to-peer distribution problem.

In a startup, a showcase application and the usability, traction, revenue model of this application is very important in the proof-of-concept stage which will eventually turn to a profitable business.

In addition, honestly, it takes enormous money and effort to be a framework company. It doesn't happen overnight.

Mistake No 2: "Everyone will love this cool technology"

Fall in love with its technology and produce a product that nobody wants

Many entrepreneurs forget that few people buy a product or consumes a service because it is just a cool technology. Unless the end product or service is any use to many, the business can hardly scale to a size that makes you a significant company.

It is the product that matters not the technology in order to become a company that is significant. The technology is an enabler, a differentiator in the product. With technology you can deliver things that you weren't able to before. With technology, you can make it cheaper, faster, better,... But nobody buys the technology by itself, the buyers/ consumers don't even understand the underlying technology. They see the end results.

Mistake No 3: "I want to raise a lot of money so I can feel secure"

Raise too much money and Burn too much cash

Raising too much money is a killer. It actually makes a company die faster. I would say, raise small amounts, test if the bet is the right bet, if not learn and modify and revive. (It becomes harder to be profitable if not anything else)

Smart entrepreneurs debug and test what they think is true and verify with their market that their bet is actually true. They don't assume too much and try to build a huge business depending on their assumptions.

Mistake No 4: "We have the same features as X and more (X being the leader or worse a giant)"

Run after the Competition

Entrepreneurs, believing they have a technology that is much better than that of the big players, the usual suspects, try to adapt the features set of the competitors. That doesn't necessarily make any difference in the product, nor in the experience that the end user receives.

Try to be revolutionary instead of evolutionary and try to disrupt the very rules of the big players. After all, in disruption you have a big advantage being a startup.

Mistake No 5: "While we do our advertisement product, we will also run a content site that uses the product"

Startup with No Focus, No defined Bet

A startup has limited time and limited money to spend. Therefore, the startup shouldn't try to do too much. The startup needs to concentrate on what the entrepreneur and the team knows and can do best. They need to create a value there. They don't need to waste their precious and scarce money and time on things that they don't want to bet on.

The real value that the startup can gain is in the creation or expertise that the entrepreneur and the team will gain in testing its bet, focusing on the core business. Doing that, the company gains huge value learning the market, rather than guessing.

Therefore, the startup needs to focus on a defined bet and learn. When they hit the target and really create something wanted then they can build the business around it. But their core needs to be valuable and most of the work and value creation (operational and strategical) needs to support the core of the company.

Mistake No 6: "We can't define the Product, We don't have a CTO, we don't have ...."

Lack of Talent in the right places: The Human Resources Problem

The gap between technology and a useful and wanted product is hard to cross over. It is the entrepreneur's job to find the right people and build the team. However, especially in the emerging world, experienced talent who believes in a startup can be hard to find.

The entrepreneur's job is to find and partner with the right people for the right reasons.

The lack of management talent and the lack of productization experience becomes a killer for the company very early on.
That is why you see many hard core technologies with no specific products.

Another important talent for the startup is the CTO (chief technical officer). CTO is a very important person that a startup needs, who is key in finding the right ways and using the right technical tools and strategies for adoption, stickiness, openness, scalability, etc.

Mistake No 7: " I need to make money fast"

Chose early revenue and divert from the grand vision

An entrepreneur needs to focus on the milestones.

If you are in technology business in an emerging country, it is harder to keep believing in and keeping your head straight out of the local ups and downs, how other people are making money, etc.

Local dynamics become a threat for the entrepreneur, because the technology market is still in its infancy. However, big corporations need consulting budget and have just asked for the entrepreneur's help. Todays' money looks sweeter than risk and tomorrow's gains. And the entrepreneur usually chooses to dedicate some or all of her and the company's time doing consulting and making money, without working on the grand idea or the product.

Lack of success stories yet, lack of respect for innovation and the lack of an existing ecosystem to support the idea owner/ entrepreneur in the region causes the entrepreneur to divert from her idea. By working with a company that doesn't have a place in the grand vision, causes her to give it all up. It is the story of the boiling frog. When she realizes that she hasn't done anything for her product, the window of opportunity is long gone. She probably will realize what she has done when she sees some other entrepreneur doing exactly what she wanted to do.

But thanks to the Internet and the global World, that is changing rapidly. Success stories from the emerging world enlighten the path more and more.

Mistake No 8: " I can't tell anybody about my project. They will copy it right away!"

Secrecy: The tendency to create a closed environment and keep the ideas and projects secret

A smart entrepreneur knows that execution is the key for an idea to be successful. A smart entrepreneur also knows that she needs to learn through the process of talking and sharing. If she keeps the idea to herself and not share and have the opportunity to discuss it with other people, then she will end up learning what others think after she has spent a lot of time and money.

Ideas need to be collaboratively worked on to make it practical for many to use. A smart entrepreneur gets all the information she can about what potential partners can think or what the customers say, even if it is just a preliminary stage. Ideas are very valuable and different ideas concerning

This also has a really negative effect in the environment as the ecosystem of innovation needs and open environment where everybody shares ideas, and opinions and ideas become mature through a collective sharing process. Open environments readies and allows innovation.

It is healthy to get in discussions and create conflicts. No conflict no interest!

Mistake No 9: " We don't have the Stock Option Plan"

Don't share the upside with team members

Stock option plans still don't exist in the emerging countries. It is crucial for a startup to have the stock option plan, because it is the only way to attract talent. Stock option plans allows the wealth to be created to be distributed among the team members. It sends the signal to the team members that the success is through the work of the team and the rewards will belong to the team.

Mistake No 10: "My first motive is to get rich"

Try to get rich instead of changing the world

Creating some local copy of a winning business is an easy win. However, in a fast globalizing world, this strategy will soon be futile. In addition, without understanding the business deep enough, a person can't really make a successful copy. A successful copy needs a lot of understanding of the
business as well. When the entrepreneur's target is to only get rich, we don't believe technology is an area that is easy to play in.

Instead, innovate, innovate, innovate...

Mistake No 11: "Who Needs Mavens, Connectors and Salesman?"

In an era where information is abundant and reachable by anyone, for a product to stick the entrepreneur needs mavens, connectors and salesman. In an emerging World this is another challenge, which we will keep the issue to another post for now.

Mistake No 12: "Show me the Money!"

Venture Capital isn't just a game of finance, it is more a game of operational management capabilities, expertise, network, simply "the business itself". Finance is just the means to be cash flow positive and stay alive without facing bankruptcy during 'the idea' to "to-market'. Venture capitalists need to add significant value to the company. In our mind, that is much more important than the finance that a venture capital firm provides.

Without the value big threats await the startups. The finance speed up the process in a company's growth, in other words capital buys the time to market, make the process faster. In parallel, the entrepreneur and the team needs to be equally ready to deal with the problems that come up faster than they will be ready to face. They need to be emotionally ready to understand the market, interpret what the market tells them, what the next steps need to be or many times deal with the company and team problems, which require more emotional objectivity.

That is why choosing the right Venture Capital firm very important in a startup's life. Seasoned executives know the roller coster ride, foresee the problems before happening and support the entrepreneur and the team and help them keep their business and help them grow.

Very nice, these are the mistakes commonly made by pledging entrepreneurs. I especially like the "I need to make money fast." It seems entrepreneurs tend to forget that money comes slow in business. Very rarely does money come like a raging torrent. Real entrepreneurs know that in business, patience is a virtue.